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U.S. tech companies use offshore cash to invest in gvt debt

U.S. tech giants are using cash from low-tax offshore subsidiaries to buy U.S. government debt, resulting in the United States making significant interest payments to those same subsidiaries, the Bureau of Investigative Journalism (BIJ) reports.

Apple, Microsoft, Google and Cisco Systems collectively hold $254.9 billion in cash in foreign subsidiaries which, should it be repatriated back to the United States, would incur corporate income tax at 35 percent, the London-based not-for-profit organisation said.

Those same tech companies have used their offshore cash piles to invest $163.2 billion into U.S. sovereign and U.S. government agency debt, the IBIJ said, citing U.S. Securities and Exchange Commission disclosures.

“This is a ridiculous situation. The result is US taxpayers pay interest on this money as opposed to the government receiving taxes,” professor of law at University of Michigan, Reuven Avi-Yonah, said in statement released by the BIJ.

“Bringing this cash onshore and taxing it at 35 percent would significantly help reduce the annual deficit of the US government,” he added.

There is no suggestion that any of the companies’ activities are in any way unlawful.

Questioned by the BIJ about their use of offshore subsidiaries to invest in U.S. debt, Cisco Systems said that the company “pays all taxes that are due,” that “the cash held in Cisco’s non-US subsidiaries is generated from Cisco’s international operations,” and that “any interest income that Cisco receives on its U.S. government obligations is U.S. taxable income to Cisco.”

Tightening tax loopholes has gained urgency in the aftermath of the global financial crisis when developed nations’ efforts to avert economic meltdown left them with gaping budget holes and record debt.

Reports of profit shifting by companies away from high tax countries to more relaxed tax regimes have sparked public inquiries in the United States and Britain.

The Group of 20 (G20) last month endorsed a set of common standards for sharing bank account information across borders with automatic exchange of information among its members to take effect by the end of 2015.

The world’s top economies hope that a tightening of the tax rules will prevent so-called Base Erosion and Profit Shifting by multinationals that exploit gaps and mismatches in national tax rules to make profits “disappear” from high tax regimes and shift to low tax locations.

Divisions remain within the G20 on issues such as whether technology companies should be taxed at the source country, where the customer is and value is created, or at the residence country, where the product originated. However, Australian Finance Minister Joe Hockey told Reuters last month that there was consensus that companies had to pay.